Budget Committee calling
MNB chief on the carpet could have Python-esque results
Mihály Varga, vice
president of the main opposition party Fidesz, proposed a hearing with central
bank (MNB) governor András Simor in front of Parliament’s Budget Committee to
receive an explanation as to why the Monetary Council (MC) raised the benchmark
rate by 25 basis points to 8.50% last Monday.
Albert Molnár, a
Socialist member of the committee, said the rate hike was damaging, costly and
groundless, and so he gave his support to Varga’s idea. The first things that
pop into our mind with regard to the whole issue are a place called Absurdistan
and a unique Hungarian version of a famous Monty Python sketch, the Ministry of
Silly Walks.
If we wanted to crack bad
jokes we would say that it is those people that want to summon Simor for a
hearing now who provide stupendous proof for their incompetence on their very
own turf almost every day.
In this regard, we could
mention the dreadful tax proposals and the joint and successful efforts to
sabotage the public finance package – and these are only from recent weeks. Or
with gigantic and obvious disproportion we could start moaning about the fact
that our political elite that has been wallowing in the pond of political
laziness since 2001 now freaks out about a 25-bp rate hike.
Let’s set these aspects
aside for a second – after all, we live in a democracy where you can indeed
question the central bank’s decisions – and give some thought as to why the MNB
raised its base rate last Monday.
If we assess the
situation, we find a case that is exceedingly simple; the central bank believes
that its inflation target, which it had set jointly with the government, is in
danger, and bound by the letter of the Central Bank Act it tries to take
measures to achieve price stability.
Those criticising the
MC’s decision have no other task but to modify the inflation target and rewrite
the Central Bank Act. They would see the consequences at once: the loss of
credibility at the MNB would be so huge that it would cause a considerable
forint depreciation, skyrocketing inflation, shrinking private consumption and
real economy loss.
Of course, there may be
subjective elements in the assessment of the current situation. Some may think
that despite a clear indication by the MNB the inflation goal could in fact be
achieved and they may also be concerned about the negative implications of
monetary tightening on economic growth.
OK, fine. Then please
someone explain why a 25-bp rate increase would obliterate the local real
economy (completely insensitive to domestic interest rates) and the export sector
that is performing well at the current exchange rate even with a sliding
European business sector.
If one tries to find the
reasons for Hungary’s growth predicaments, he should better look under the rock
of fiscal policy. It wouldn’t hurt to grab a book too… like Basic Economics.
You may also ask whether
it is the fault of the central bank that inflation risks are so massive in
Hungary. Looking back, we can state that monetary policy has recently been
unjustifiably optimistic about the inflation course and so it was uncertain how
the MC would react to the situation. Whether it will now have to raise rates
even further or it could have “saved” some monetary tightening if it had acted
earlier is now impossible to answer, but we do not believe so.
At the same time we must
see that the MNB cannot be held responsible for the current rate of inflation.
The key role in the slow disinflation is played by exogenous shocks (food,
energy, raw materials), but Hungary is lagging behind in respect of CPI in regional
comparison, as well. And this may also be blamed on bad economic policy moves
made by the government. The election stop-go cycles, the faulty structure of
fiscal adjustment, the irresponsible regulatory price policies and a
long-running denial of central bank independence laid the very foundation for
Hungary to be the only country in the region that has been unable to reach real
price stability for decades. And the central bank was not on stage in this
particular scene.
So if someone is keen to
see why the MC hiked rates now, they should leave the MNB governor alone and
rather summon in front of a parliamentary committee the entire political elite,
which is totally impassive about inflation.
Of course, a Simor
hearing would not be without is advantages either, as some MPs would at least
learn some basic lessons on economic policy. We have the feeling, though, that
it would not take much effort by Monty Python to turn that hearing into another
Ministry of Silly Walks sketch.
